Hodge v. De Pasquale [2014] VSC 413 is a useful cautionary note regarding the obligations of trustees contemplating settling family provision claims, and also demonstrates how wrong it can go.

The basic facts are that Giuseppe De Pasquale died leaving his second wife, Rosa, and three daughters, Eleonora, Pia and Norina.  Rosa, Eleonora and Pia each received specific bequests in varying amounts.  Norina received the residue of the estate up to $500,000.  Any surplus over $500,000 was to be divided equally between Rosa, Eleonora, Pia and Norina.  Rosa was the executor and trustee appointed under Giuseppe’s will.

Pia brought family provision proceedings seeking a greater payment to her than otherwise provided for by the will.  Although aware of the proceedings Norina did not participate in them.  Importantly, she did not participate in a mediation of Pia’s family provision proceedings.  The proceeding settled at mediation by Rosa, as trustee, agreeing to pay Pia a further $250,000.  That payment came from the residue of the estate, and hence effectively Norina.

Norina commenced proceedings in the Supreme Court of Victoria arguing that Rosa did not have the power to compromise the family provision proceedings as she did, and that either Rosa or Pia should have to repay to the estate the $250,000 paid to Pia.

Rosa attempted to rely on s19(1)(f) of the Trustee Act 1958 (Vic), which is the equivalent of s24(2)(c.) of the Trustee Act 1898 (Tas).  McMillan J held that s19(1)(f) did not extend to the settlement of family provision claims unless the settlement was sanctioned by the Court or all beneficiaries agreed to the settlement.  Her Honour found that the settlement in this case was not a settlement of a debt or liability of the estate but rather a settlement which altered the beneficial interests in the estate.  Because the trustee was not empowered to alter the terms of the trust the payment to Pia was made in breach of Rosa’s obligations as trustee.

McMillan J found that Pia was not obliged to repay the $250,000 to the estate because she did not know that Norina objected to the settlement and that because she had executed a deed of release she could not be described as an overpaid beneficiary or volunteer.  Pia was entitled to retain the $250,000.

The outcome for Rosa was unfortunate.  She relied on the provisions of s19(1) which protected a trustee from liability when acting in good faith.  Rosa was an aged pensioner and English was her second language.  She was not a lawyer and had never been involved in family provision claims.  She obtained and relied on legal advice and she had kept Norina informed of and throughout the proceedings.  Specifically, she had informed Norina that her entitlement under the will might be affected by any settlement.

Notwithstanding those factors McMillan J found that Rosa’s duty to uphold the will and the fact that she did not not inform Norina that she intended to settle the family provision claim at Norina’s expense deprived Rosa of the protection of s19(1) of the Trustee Act.  The fact that Rosa was acting in a clear position of conflict of interests was also a compelling factor.

Rosa next sought to be relieved from liability for her breach of trust by relying on s67 of the Trustee Act, which is the equivalent of s50 of the Tasmanian Act.  McMillan J rejected that on the same grounds.

In the end Rosa was required to repay $250,000 personally to the estate.  Assuming that Rosa is ordered to pay the costs of the action (and is not entitled to be indemnified out of the estate for those costs, which is the likely result on the question of costs) the overall outcome is that a very significant portion of Rosa’s bequest will have been lost to her, Pia received $250,000 more than she was entitled, and Elenora and Norina receive their entitlements.

The case highlights the high degree of caution that must be exercised when settling family provision and similar claims involving trusts.

Lawyers advising trustees in relation to such settlements should also be wary of the potential pitfalls.  In rejecting the emphasis placed by Rosa on her reliance on legal advice, McMillan J said at [108]:

Finally, I would be wary of the emphasis placed by counsel for Rosa on the receipt of legal advice. While it is important and desirable that trustees do act on legal advice, the mere fact that they have so acted is not determinative of whether they have acted in good faith. Trustees who are poorly advised may always seek to be recompensed by their advisers, but beneficiaries whose claims are defeated by trustees acting on that advice would be left without recourse. Advice should be considered in the context in which it is given.

It would appear that the professional indemnity insurers of the lawyers advising Rosa will be carefully reviewing the advice on settlement.